What percentage do you need to put down on a house?Your down payment plays a vital role in the home buying process, and it needs to be available before you close on your home loan. Before you can determine how much money you need to begin saving for your down payment, the below factors will help you consider how much money you'll need:
- Loan types: The loan you choose will determine your minimum down payment amount.
- Private mortgage insurance (PMI) requirements: Depending on the loan, you need to purchase PMI if you pay less than 20% of your home's value. PMI can account for 0.2% to 1.50% of the original loan amount each year. These PMI rates, combined with your down payment and total loan amount, could add hundreds of dollars extra per month.
- Interest rate: The size of your down payment can positively or negatively affect your mortgage loan interest rate. A down payment represents your investment in a home, and a lender will often lower rates for higher down payment amounts.
- Monthly mortgage payment: The more money you put for a down payment for a house, the lower your principal monthly mortgage will be.
Your loan type will affect your down payment amountEvery home purchase is different. From the size of down payment to the type of loan, there is not a single "best way" to purchase a home. From experience, we can tell you that the best homeownership begins with finding a home your love within a price you can afford. While a sizable down payment on a house will help with interest and monthly mortgage payments, for some, meeting that a 20% down payment is a hardship. Regardless of your financial position, there is likely a loan available that will fit your parameters and help you meet your down payment and monthly mortgage goals. These seven first-time home buyer loans and other financial products will help you get started:
- Conventional loans
- Fannie Mae or Freddie Mac
- Federal Housing Administration (FHA loan)
- Good Neighbor Next Door
- VA loan
- USDA Loan
- State and local first-time home buyer program
- Home co-investment
Conventional loanThese loans are issued by private lenders to home buyers. Conventional loans require buyers to have a minimum 20% down payment, low debt-to-income ratio, and a high credit score. Less than 20% down payment on a conventional mortgage will require you to pay for PMI.
Fannie Mae or Freddie Mac loanThese loans are suitable for someone with a good credit history and credit score. You can get a Fannie or Freddie loan if you have just a 3% down payment. While the requirements for using this loan start at 3%, you will still have to pay PMI if you do not hit the 20% threshold.
Federal Housing Administration (FHA) loanBacked by the Federal Housing Administration with rates typically less than conventional loans, this loan is a good option for those with lower credit scores and small down payment amounts. However, these loans include additional premium fees from mortgage insurance. Those fees can add up.
VA loanAvailable to U.S. military members (active duty and veterans) and backed by the United States Department of Veterans Affairs (VA), these loans come with lower interest rates and require no down payment. However, you have to pay for closing costs and a variable funding fee, which increases after each use.
State or Local funded grantsMany states or cities offer first-time home buyer down payment assistance to entice people to move into specific locations. This aid comes from grants that will help cover the cost of down payments and offer low-interest loans with deferred repayment plans. Contact a real estate agent or local housing agency in your area for more information about these first-time home buyer loans.
Home co-investmentWhile not a loan or assistance program, using a home co-investment option, like Unison, can get you to the 20% needed for your home down payment. In exchange for their financial investment in your home, Unison will share the appreciation (and in most cases, the depreciation) of your home when you sell it - up to 30 years later. With Unison, there is no additional interest or monthly payments. In fact, you can actually buy them out after three years. This option offers buyers the chance to secure the 20% without having to pay for PMI. You still need to secure a loan for the rest of the home using one of the methods above, but it can help with the down payment and get you into a home faster.
How much can you afford?The next step is to determine how much you can spend within the housing market. Before you get attached to a beautiful new home out of your price range, assess your personal finances and determine how much house you can afford. According to the Federal Housing Agency, you should put aside no more than 25% of your monthly income to pay for your home. If you have your eye on a specific home price range, such as $200,000 to $250,000, how much income you need to afford that range can be determined with a simple calculation. While the overall monthly mortgage payment will vary depending on the life of the loan you choose, the interest rate, and location, this baseline is a good place to start budgeting. Say you make $4,000 a month. Multiply that amount by 25% to determine your maximum monthly house payment of $1,000. Based on a 30-year mortgage with a 4% fixed interest rate, here are some home and down payment options you could afford with a $4,000 per month income. (This example does not include property taxes or insurance):
- $200,000 home with a 20% down payment:
- Down payment: $40,000
- Mortgage Amount: $200,000 - $40,000 = $160,000
- Monthly mortgage: $764 per month
- $200,000 home with a 10% down payment:
- Down payment: $20,000
- Mortgage Amount: $200,000 - $20,000 = $180,000
- Monthly mortgage: $859 per month
How can I get money for a down payment on a house?The ability to have thousands of dollars upfront for a new home can be challenging. According to Realtor.com, the largest group of first time home buyers falls between ages 29 and 38, with a median age of 34. Many Millennials still struggle with student debt and job security. Tacking on the requirements for large sums of money for a new home may make many first-time home buyers balk at homeownership. Luckily, there are many smart ways to secure and a down payment on a new home:
- Ask for a gift
- Ask the seller
- Start saving
- Tap into your retirement
- Home co-investment